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Beijing Cuts Shanghai's Clout Shu-Ching Jean Chen 09.06.06, 6:20 PM ET There's profit to be made in cleaning up a filthy emerging Asia--if you have the stomach for it. In most Indian cities roadsides are dusty or caked with mud. Trash is piled high amid blood-red chewed-up betel leaves and the smell of urine. But the streets are comparatively clean in Chennai, an industrial city of 5.5 million on the nation's southeastern coast. Early each morning hundreds of workers trawl through the city's main arteries picking up mounds of litter. Street sweepers reduce dust. Garbage collectors go door-to-door to gather and haul off trash. Much of the credit for this cleanup goes to Veolia Environnement, a $30 billion (sales) Paris-headquartered outgrowth of the Vivendi water and media company that has tapped into one of the most intractable problems in Asia: pollution. Garbage experts estimate that on average every person in a developing nation produces one pound of trash per day, compared to three times that amount in a developed nation. But both the economies and populations of the largest Asian nations are growing quickly, suggesting a sharp increase in garbage generation in years to come. Already China generates 190 million tons of trash per year, more than the U.S., and by 2030, the World Bank estimates, that figure will jump to 480 million tons. Yet only between 5% and 50% of China's waste is either incinerated or buried in a suitably sequestered landfill; the comparable U.S. figure is probably near 99%. In India and Indonesia, less than 5% of waste is handled properly. Untreated garbage seeps into waterways and poisons drinking water. Open sewers and industrial pollution compound the problem. In April the head of the U.S. Environmental Protection Agency visited China to encourage officials to use technologies that could ameliorate the nation's severe air pollution. For Veolia and competitors all this smells like opportunity. Veolia has entered into contracts in China, India and other Asian nations to clear solid waste and build landfills, wastewater and sewage-treatment plants, as well as provide clean drinking water. Veolia handles 20,000 tons of Chinese garbage per day. As a result, Veolia's revenue from Asia hit $1.7 billion in 2005--a 29% increase over the previous year--and executives say it could increase another 15% to 20% annually for the next five years. Veolia's biggest competitor, Paris-headquartered Suez, has teamed up with New World Development, a Hong Kong conglomerate headed by billionaire Cheng Yu-tung. Since starting its work in the region three decades ago, it has built 150 drinking-water treatment plants in Chinese cities, serving 250 million people. The $53 billion (2005 sales) company now runs the two biggest landfills in Hong Kong and is testing a hazardous waste incinerator in Shanghai's main industrial chemical center. These companies go where others fear to tread. Building a landfill or incinerator means importing heavy machinery and highly trained experts and getting a long-term commitment from the host country. Often, contracts are opaque, cash flow is uncertain and there is little recourse in the event of government corruption or expropriation. There is the additional risk that a local competitor will underbid by cutting corners. Many U.S. companies have steered clear. "It's hard for a reputable company to compete with people who are willing to ignore regulations or pay bribes to get past inspections or enforcement," says Sandra Cointreau, a solid-waste adviser to the World Bank. But European companies have been eager to expand beyond their own borders. They offer the same technological and financial resources as Americans without the inconvenience of our Foreign Corrupt Practices Act (although it must be noted that Veolia and Suez insist they maintain the highest ethical standards). Beginning in the 1970s European governments lent China money, requiring Beijing to use it to hire European pollution-remediation companies. One of the first to take advantage of this was Suez. By 1992 Veolia made its first Asian contact by setting up a waste-to-energy plant in Macau, but for years Chinese municipalities expressed little interest in Western-style pollution control. "The only thing they had in mind was GDP, GDP,GDP," says Jorge Mora, Veolia's point man in China. But by the end of the decade that began to change, Mora says. With relatively transparent contracts, low corruption and an apparent willingness to accept foreign help, Chinese investment devoted to pollution control reached $115 billion between 1996 and 2004. Beginning in 2000 Veolia landed contracts in Guangzhou and along the coast; it now handles 60% of the waste in Shanghai. In the 1990s Waste Management (nyse: WMI - news - people ) considered teaming up with a Japanese outfit to set up a plant in Taiwan. But the executives soon realized there was little guarantee the nation's trash would be properly collected. "If you put in $200 million to $300 million and you're not sure the waste is going to get there, that's a risk we're not going to take," says Richard Felago, a senior vice president at the Houston company. Getting paid is tough, too. Suez built a water treatment plant financed with a dollar-denominated loan in Indonesia but was unable to cover its debt when Jakarta devalued the Indonesian rupiah during the Asian financial crisis. Now the company makes all its investments in local currency and divides risk among lenders, partners and local water authorities. Even a relatively stable country like India can be tough to navigate. The country almost completely ignored waste as a problem until, in a spell of judicial activism, the Supreme Court decreed that all cities of 100,000 people or more must provide disposal by the end of 2003. A 2000 law further mandated the separation of organic waste from recyclables--something that has also proved impossible. "I don't think any city has met the deadline," says N.C. Vasuki, head of the International Solid Waste Association. Bureaucracy is one reason. Authorities in Tirupur, in India's south, invited a private contractor to build a composting plant, but the city refused to enforce laws requiring garbage segregation, arguing it did not have the resources. It then refused to allow the plant to function with mixed garbage. Now the trash is dumped in the open; the plant processes at only 10% of capacity. Still, in 2000, Veolia invested an initial $9 million for transfer stations in Chennai and a workshop to service garbage trucks. It introduced Western business standards: While tradition dictated that only workers belonging to certain castes could be hired for cleaning, Veolia opened up hiring and clothed its 2,300 employees in uniforms, offering training in customer service and vaccinations every six months. Its entry prompted the city garbage authority to behave more like a private contractor, too. It reduced head count and offered incentives to reduce absenteeism. Employees were allowed to segregate recyclable waste and sell it on their own. Now employees go door-to-door collecting garbage, even in Chennai's gang-ridden slum. Veolia's Chennai workers have gone on strike three times since 2001. Authorities have accused the company of inflating its bills; Veolia disputed it and countered that it does not get paid on time--a fact that has diminished its enthusiasm for bidding elsewhere. In addition, Veolia's contract, now under negotiation, calls for collection only, not disposal. So rather than landfilling the garbage, it dumps 1,200 tons of trash a day into a 100-acre-plus marshy mess that adjoins a reservoir of drinking water. On a recent day ragpickers, including children, dug through piles of trash, hoping to find something salvageable that they could sell. Veolia executives insist there is little they can do for now. "I don't really like the contract," says Mora, who runs the Asian operation. "Yes, we did a good job of cleaning up the garbage and cleaning the city. But the treatment is still done by the local government, and they are not doing it properly."

[Forbes News] Beijing Cuts Shanghai's Clout